Outsourcing the problem

Poor old British Airways. Just when it's got its passenger numbers and profits moving in the right direction, it gets landed with problems caused by large-scale unofficial industrial action at its in-flight caterers Gate Gourmet.

The fact that BA's problem has come in the middle of August, the peak holiday season, only adds to its woes.

While it's right to be sympathetic to BA's plight, inevitably the Company is going to face some testing questions from its major shareholders about how it got stuck in such a position.

They will demand to know why BA became so heavily reliant on such a strong, single supplier. Surely it would have been better off not allowing Gate Gourmet to become effectively a monopoly provider?

Why couldn't it have at least two suppliers for such key service? It must surely be aware that its business passengers, from whom its makes the highest profits, are not going to remain loyal for long to an airline that can only supply rudimentary food and drink, especially on the major transatlantic and other long haul routes?

Perhaps we are being harsh on BA. For years, management gurus have been advocating that all businesses should outsource "non-core" services. The logic for outsourcing is impeccable.

If your business is retaining staff to perform tasks that are not essential to your main operation, from handling the pay roll, through to IT functions, cleaning or any other regular job that doesn't define your product or service, then it is distracting itself from its real mission. This is the argument for outsourcing.

And a good argument it is too. It is, however, flawed in certain situations. Outsourcing admittedly can solve a lot of problems. Many of our small businesses could not, for instance, possibly afford to hire two or three permanent staff to maintain their computer networks.

Whereas IT handled by a reputable third party tends to make much more commercial sense.

Problems with outsourcing, unfortunately, only tend to come to light after a certain amount of time has elapsed. For example, it is only after the expertise that was in-house is gradually lost that the company discovers what a vulnerable position it is now in.

Once the people who knew how to do the job have left, it is much hard harder to assess whether the service from outsourcer is up to snuff, and/or whether what you are paying is value for money.

Another danger of outsourcing is when your company gears its internal systems and ways of doing things around the particular approach of a single outsourcer. Conforming to its protocols, while making sense for this supplier, may inadvertently shut the door completely to better and cheaper rivals who do the same things but differently.

Sadly, problems with outsourced services are far from uncommon. In fact, Deloitte Consulting recently discovered that around 70 per cent of companies had negative experiences with outsourcing.

In general, they found that end users were disappointed with lack of cost savings, hidden costs and amount of management time they had to dedicate to supporting the outsourcing project.

• First, on mission critical services, consider placing the outsourced service with at least two different suppliers. But be clear to establish that each, should an emergency arise, has the spare capacity should one or the other let you down.
  
• But don't outsource solely on the basis of trying to reduce costs. Instead, ask about for quality of service, as much as value for money.
  
• Always remember that if you squeeze the price down too far or too quickly, you risk de-stabilising your outsourcing supplier.
   
• Before considering outsourcing, always ascertain from your customers what they expect of you and why they chose to do business with you. It may be that your customer relations skills and personally-tailored services were the most compelling part of your operation. In this instance, using outsourced services such as call centres may be completely out of the question.
  
• Maintain regular dialogue with your suppliers, with reporting and meetings meetings, to ensure that you fully understand how they operate and what systems etc they have in place to provide you with the service.
  
  This means you are not knowingly allowing knowledge or expertise to move so far out of house that you cannot measure their performance and added value accurately. In simple terms, you must expect to have to spend time and effort managing the relationship.
  
• As a matter of policy review all key suppliers annually, more often if necessary. And make sure your suppliers know that you have this policy in place (which should limit the risk of the outsourcer developing complacency or taking your custom for granted).
  
• Always have a "Plan B" in case your outsource supplier lets you down.
  
• Remember that with increasingly cheap and efficient technology, it may be perfectly practical to bring formerly outsourced services back in house more cost effectively.
  
  An example is website maintenance, which was until a few years ago was deemed a dark art masterable only by uber-techno-geeks, but today can be treated as a fairly straightforward piece of company administration like invoicing.

To sum up. It's easy to blame the outsourcer. Many of the companies in dire difficulties with whom I deal tend to cast around for other companies to blame. Apportioning blame or finding fault is not going to bring about a solution. Like all good relationships, the best ones are based on mutual respect, trust and regular dialogue.

If you treat outsourcers with the respect they should show you, there's no reason why it can't be made to work. But if you also follow the proverbial advice and don't put all your eggs in the same basket, you are unlikely to come seriously a-cropper.

Nick Hood is the senior London partner at corporate recovery experts Begbies Traynor Group plc.